Washington, D.C. - Congressional leaders wrestling with President Obama's plan to make the Bush administration's tax cuts permanent for middle-class families earning under $250,000 a year are hearing a sharply divided response from top economic experts.

During recent Senate Finance Committee hearings on the need for middle-class tax relief, University of Virginia tax expert George Yin warned Congress that an economic catastrophe is likely to be in the cards unless the Bush tax cuts are allowed to expire on schedule next year.

The tax cuts that he recommended permitting to lapse include the expiring individual income tax rate reductions, increases to the child tax credit, and so-called marriage penalty relief, as well as the reduced tax rates for dividend and capital gains income.

Yin, the university's Edwin S. Cohen Distinguished Professor of Law & Taxation, also suggested repealing the Alternative Minimum Tax, while simultaneously recapturing those revenues by "reforming the regular income tax to collect roughly the same amount of tax as if the AMT had not been repealed."

Without this, he warned, "We risk such serious economic disruption in this country as to make recent events look like child's play. Even worse, we risk the possibility of triggering worldwide instability and geopolitical conflict."

Yin based his dire predictions on the Congressional Budget Office's own forecasts, which indicate that by 2030, the cost of Medicare, Medicaid, Social Security and interest on the national debt will total 19.3 percent of the nation's entire gross domestic product.

Noting that this percentage is more than the historical average of total government revenues, Yin said that without significant tax increases, "There would be no money left for national defense, all discretionary non-defense spending, and all other entitlement programs, including federal employee and military retirement programs, food stamps, unemployment compensation and veterans' benefits."

But the really bad news, according to Yin, is that the CBO's projections were made prior to the recent Wall Street and banking industry bailouts, and do not include any of the new spending initiatives in the Obama administration's budget plan, which figure to triple the national debt over 10 years.

Warning that time is running out, Yin told the committee, "We are beyond the point of being able to kick this problem down the road a little further."

Other expert witnesses at the Senate hearing also called for congressional action, but proposed a significantly different prescription for tax policy.

Testifying on behalf of the Center on Budget and Policy Priorities, executive director Robert Greenstein defended Obama's decision to make the Bush tax cuts permanent for taxpayers earning up to $250,000 while reducing or eliminating them for those in the top brackets.

"Given the nation's fiscal position, extending the upper-income tax cuts would be unwise for both the budget and the economy," he said. "While these proposals have been criticized for producing a 'high-tax' government and imposing crushing tax burdens on high-income Americans" and small-business owners, Greenstein said that these charges don't hold water.

THE RIGHT CUTS?

On the right side of the political spectrum, American Enterprise Institute tax specialist Alan Viard preached the opposite conclusion in his testimony.

Viard recommended against any significant middle-class tax relief at this time, and argued that tax cuts for those in the middle brackets provide limited incentives for the work and saving that drive economic growth, while imposing substantial revenue costs.

In contrast, Viard said, President Obama's plan to curb tax breaks for upper-bracket taxpayers would eliminate growth incentives while providing little new revenue.

"From the standpoint of economic growth, the proposed combination - the expiration of these growth-oriented provisions and the extension of middle-class tax relief - would offer the worst of both worlds," he said. "Revenue would be reduced without a commensurate improvement in incentives."

Sen. Charles Grassley, R-Iowa, the Finance Committee's top Republican, expressed at least partial support for the tax policy course laid out by the Obama administration.

"President Obama's budget makes most of the bipartisan tax relief from 2001 and 2003 permanent, and we now have agreement on issues like the marriage penalty," he said at the start of the hearings. "Working families will be able to continue to count on lower rates; low-income seniors who are counting on their capital gains and dividend income can sleep a little easier; [and] the ravenous monster that is the Alternative Minimum Tax will be held back from the middle class."

Significantly, though, Grassley agreed with Viard that the efforts by Democrats to eliminate the tax cuts for upper-bracket taxpayers could backfire on the fragile economy.

Those tax provisions are needed "to provide incentives for the creation of jobs and the resuscitation of our economy," Grassley said. "These provisions helped grow the economy when they were put into effect," and "could be a valuable tool in our recovery if we don't cast them aside."

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